Taking a group approach to lowering the cost of college loans
Nikhil Agarwal and Chris Abkarians started a business together last summer, even though they had never met in person. Agarwal was living in Seattle, working as an engineer for Boeing, and Abkarians was in Los Angeles, analyzing the economic value of television shows for Netflix, which buys a lot of them.
The duo had been accepted at Harvard Business School, and both chose to take out loans to help finance the $218,000 cost of the two-year program. “I definitely needed the loan to pay for it,” says Agarwal, who grew up in India and came to the United States a little over a decade ago to study aerospace engineering.
When you are accepted into business school these days, you also gain entry into a number of digital communities that let incoming students communicate with each other: a Facebook group, a Slack channel, a GroupMe text message.
In one of those groups, Agarwal heard about several students from Israel who’d banded together, gone to a bank, and negotiated a better rate for their student loan. So he asked incoming Harvard Business School students in the United States whether they’d like to try something similar. “Anyone interested in attempting a group negotiation, let me know,” he wrote last May. “It should be a fun experience, if nothing else.”
Agarwal set up a special Facebook group to discuss the notion with interested students; Abkarians stepped forward to help with the project.
The next step was sending cold e-mails and LinkedIn messages to bank executives, asking if any of them were interested in cutting a special deal on loans to a group of future MBAs. At the time, they had a group of students who needed about $4 million in loans, and banks wouldn’t give them the time of day, Abkarians says. They kept on building the size of their negotiating group by inviting students from other business schools, and after low-level bank executives rejected them, they tried sending messages to CEOs.
“This was all in May, June, and July, while we were both still working our day jobs,” Abkarians explains. They were racing the clock: A key condition was finding a lender who would be able to get money to the financial aid office before the payment deadline for the fall semester. Abkarians and Agarwal communicated with each other primarily using Facebook’s Messenger app. Occasionally, they’d have a Google Hangout video chat.
They eventually attracted more than 700 incoming students at schools like Stanford, Duke, and Northwestern to the negotiating group, entirely through digital word-of-mouth. And they found a lender, Connecticut-based Laurel Road, that was willing to cut a deal with the group.
“A little over 400 of the 700 students ended up taking loans that totaled about $30 million,” Abkarians says. When the pair surveyed students afterward, they found the average savings for a 10-year fixed rate was about 1.2 percent, compared with the lowest private loan rate they’d been offered before joining the negotiating group. (The difference was even larger when compared with federal loan rates.) For a $100,000 loan over 10 years, they had figured out how to save students about $7,500 in interest payments.
One thing that surprised them was how unsophisticated even students accepted into some of the world’s best business schools were when it came to the differences between student loan options.
“We got a lot of basic questions,” Agarwal says. They found that many students would reflexively sign up for a federal loan that carried a 4 percent origination fee, forcing them to cough up a few thousand bucks upon signing the paperwork. (The loan deal they negotiated had no origination fee.)
“One thing we created was really simple: an amortization calculator in a Microsoft Excel spreadsheet,” Abkarians explains. “We shared to the Facebook group. They could select the amount of money they needed to borrow, what it would cost them with a federal loan, and compare that to a private option. That was the kind of tool that helped a lot of people realize what they were leaving on the table, and what the rates meant.”
Agarwal and Abkarians met face-to-face for the first time when they showed up in Boston in mid-August to start school. They had already applied for work space at the Harvard Innovation Lab, which serves as a nest for student-founded startups, by making a short video explaining their idea. They’d chosen LeverEdge as the name for the business. (Clever: Say it out loud.) They also attracted $25,000 in funding from Pear, a California venture capital firm with a program that funds “dorm room” startups.
The young company’s goal is to attract 5,000 students who need loans by the fall, and Abkarians says it’s been talking to financial aid offices and student body groups to see who is willing to help promote LeverEdge. It’s also planning to expand beyond business schools to law, medical, dental, and pharmacy schools. From the bank’s perspective, LeverEdge is a more efficient way to attract new customers, helping them save on marketing costs; in return, LeverEdge gets paid a referral fee.
LeverEdge is one of the newest of a cluster of companies in the Boston area, including Edmit, Gradifi, and MentorWorks, that are trying to hammer away at the high price of higher education. When I asked many of the founders of those companies, and others who provide money to so-called “edtech” startups, no one said they’d seen an approach exactly like LeverEdge’s.
LeverEdge has discovered an “interesting idea,” says Sabrina Manville, cofounder of Boston-based Edmit, a startup that helps students and parents understand the costs of college. But one key question LeverEdge will face as it tries to increase the number of students it serves, she says, “is how big the pool can get without diluting the risk profile,” which would lead banks to revert to their standard market rates for loans.
When LeverEdge got started last year, it had a group of 400 students from the most prestigious business schools in the country. Will that work with thousands of students from all different types of graduate schools, with different earning potential? LeverEdge will find out.
In Boston, we like to sit on both sides of the blackjack table — dealer and player. Our august institutions of higher education keep finding new ways to raise the price, and startups keep looking for ways to make it more affordable. It may not be sustainable forever, but for now, that’s what you’d call a win-win.